Alan Greenspan is an American economist who served as the USA’s Chairman of the Federal Reserve between 1987-2006, the 2nd longest tenure in the role. Ronald Reagan nominated Greenspan to become Chairman of the Fed on 2nd June 1987, and George Bush nominated him to serve an unprecedented 5th term on 18th May 2004. Despite most of his public appearances being fairly subdued, the media circus around him likened him to a rock star. Greenspan was, fundamentally, a Monetarist, with his monetary policy decisions largely following Taylor rule prescriptions.

In February 2007, Greenspan forecast a recession in the USA, citing stabilising corporate profits as the main influence in his prediction. However, it is argued that Greenspan’s policies at the Federal Reserve helped to cause the 2008 global financial meltdown. The Fed had been pushing an easy money policy for a number of years and it is thought that this was a leading cause of the subprime mortgage crisis, as well as the dotcom bubble that preceded it. American political commentator Robert Reich wrote that “Greenspan’s worst move was to contribute to the giant housing bubble and the worst worldwide crash since the Great Depression. In 2004 he lowered interest rates to 1%, enabling banks to borrow money for free, adjusted for inflation. Naturally, the banks wanted to borrow as much as they possibly could, then lend it out, earning nice profits. The situation screamed for government oversight of lending institutions, lest the banks lend to unfit borrowers. He refused, trusting the market to weed out bad credit risks. It did not.”

According to Paul Krugman, when Greenspan’s Fed began to raise interest rates, it was too late. The Fed raised “interest rates to curb the market’s enthusiasm; he didn’t even seek to impose margin requirements on stock market investors. Instead, he waited until the bubble burst, as it did in 2000, then tried to clean up the mess afterward”.

According to the New York Times, Greenspan conceded his error on financial regulation in 2008. “A humbled Mr Greenspan admitted that he had put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending … Mr Greenspan refused to accept blame for the crisis but acknowledged that his belief in deregulation had been shaken”. Greenspan placed blame on Wall Street for bundling subprime mortgages into securities.

Alan Greenspan advised the George Bush administration to depose Saddam Hussein in order to protect the USA’s interests in the oil markets. Greenspan argued that any disruption to the flow of oil would mean high oil prices and chaos in the global economy, bring the industrial world “to its knees”. His biggest fear was that Saddam would seize control of the Straits of Hormuz and restrict the transport of oil through them. He states that “people do not realise in this country, for example, how tenuous our ties to international energy are. That is, we on a daily basis require continuous flow. If that flow is shut off, it causes catastrophic effects in the industrial world. And it’s that which made him [Saddam] far more important to get out than bin Laden.”

Interesting Facts

In his role as the Chairman of the Fed, Greenspan was preceded by Paul Volcker and succeeded by Ben Bernanke.

Greenspan obtained his PhD in economics in 1977 from New York University, but he requested that his dissertation be removed from the university’s records. However, a copy of his dissertation was obtained in 2008 and it was revealed to include “a discussion of soaring housing prices and their effect on consumer spending; it even anticipates a bursting housing bubble”.

“I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”